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The 2011 National Basketball Association playoffs begin this weekend, and for the first time in seven years one of the most valuable and well-known teams in the sport, the New York Knicks, will participate. Long-suffering New York basketball fans won't be the only ones cheering, however. Shareholders of
Madison Square Garden,
MSG -0.03399048266485384%Madison Square Garden Co. (New)U.S.: NYSEUSD176.46
-0.06-0.03399048266485384%
/Date(1481305803975-0600)/
Volume (Delayed 15m)
:
21736
P/E Ratio
N/AMarket Cap
4229948962.0398
Dividend Yield
N/ARev. per Employee
128834More quote details and news »MSGinYour ValueYour ChangeShort position
the public company that owns both the Knicks and professional hockey's New York Rangers, also could have lots to celebrate as 2011 unfolds.

Spun out of
Cablevision Systems
(ticker: CVC) in February 2010, Madison Square Garden (MSG) is a cash-rich conglomerate with a diversified portfolio of media and entertainment properties that could benefit from a recovering economy. The New York company is best known for its namesake arena on Manhattan's West Side, and for the Knicks franchise, which generated significant buzz in February when the team signed basketball superstar Carmelo Anthony.

A recent team addition, forward Carmelo Anthony could help the Knicks advance in the NBA playoffs.
EPA /Landov

But MSG's real driver is its media business, composed largely of two cable networks—MSG Networks and MSG Plus—that broadcast sports programming. The MSG Media unit contributed 48% of Madison Square Garden's $1.16 billion in revenue in 2010, and all of its operating income of $135 million. Unit revenue rose 16% last year, to $551.5 million, and operating income was up 40%, to $209 million, driven by higher affiliate fees and advertising sales.

Barring a players' strike (more about that later), MSG could generate total revenue of $1.2 billion this year, and earn $1.08 a share. Analysts are forecasting earnings of $1.22 a share in 2012.

Cash flow will be considerably higher, however, especially after a major renovation of the company's namesake arena, due to begin this year. Dan Martino, manager of the T. Rowe Price Media and Telecom Fund, estimates MSG will be capable of generating $3 a share in cash in 2013, up from 85 cents last year, as the sports teams improve and the New York City economy grows more robust. He thinks the stock, now around 27, could command 14 to 15 times free cash by the end of next year, which would imply a price of 45 to 46 a share.

None

"As we get past the renovation, free cash flow will be clear to investors, and I expect management will make an effort to highlight it, either through a modest levered recapitalization or a regular dividend or [stock] buyback," says Marino. T Rowe Price owns about 7.5 million, or 9.9% of MSG's outstanding shares.

MADISON SQUARE GARDEN HAS SCOREDwith investors since its public debut. The shares have rallied 25%, endowing the company with a market value of $2.1 billion. Management reports results through three operating segments, although MSG Media is expected to drive results again next year. MSG Sports generated 32% of 2010 revenue but lost $1.8 million, while MSG Entertainment, which produces live events and holds leases on Radio City Music Hall and several other venues, chipped in the remaining 26% of sales but lost $38.6 million. The sports division suffered from higher player expenses, among other things, but returned to profitability in the fourth quarter, helped in part by more ticket sales. MSG Entertainment was hurt by severe winter weather in the New York area late last year and early in 2011.

To some, the biggest news at MSG might not be the Knicks' ascendancy but the makeover of the aging Garden, which will take two years to complete and result in an expansion of luxury boxes and concession space. The company also will install wired billboards to display ads based on audience demographics.

While analysts expect the renovation to boost cash flow in the long term—Richard Tullo of Albert Fried & Co. sees it adding $900 million in the next decade—costs continue to rise. MSG spooked investors last month by raising its construction-cost guidance to $977 million from $850 million. But it claims to have the cash flow and credit facility to handle higher expenses. The company ended last year with net cash of more than $350 million, or $4.67 a share.

BASED ON A SUM-OF-PARTSanalysis, Madison Square Garden could be worth more than 50 a share. Chris Marangi, a portfolio manager at Gamco Investors, pegs the value of the of the sports teams, including the New York Liberty of the Women's Basketball Association, at about $1 billion. (Gamco CEO Mario Gabelli recommended MSG in January in Barron's 2011 Roundtable, when the stock was around 24. See "Think Contrarian," Jan. 29, 2011.)

The air rights above the Garden, the only commercial sports arena in Manhattan, are worth about $250 million, Marangi estimates. The MSG and MSG-Plus networks comes could be worth $2.5 billion, while long-term leases to Radio City and its Rockettes, New York's Beacon Theater and other venues are valued at $250 million.

After adding in cash and subtracting $400 million for the Garden renovation, Marangi arrives at an asset value of $4.1 billion, or 54 a share. Even if some of his estimates are aggressive, the exercise suggests a value well above the stock's current prices.

That value could be unlocked if the Dolan family, MSG's controlling shareholder, moves to take the company private, as some investors expect. The family has tried several times to buy out minority holders in Cablevision, which it also controls. The Dolans own 2.5 million of MSG's 62.3 million A shares and all the 13.6 million B shares, giving them 70% voting rights. James Dolan, 55, has been chairman of MSG since 1999, while Hank Ratner, 51, is president and chief executive officer.

Marangi isn't banking on a buyout, at least not in the near term. "You buy MSG because you're getting the shares for 50 cents on the dollar," he says. Gamco owns 3 million MSG million shares.

SOME ANALYSTS SEE DOWNSIDErisk to 20 in MSG's shares if the teams stumble and the entertainment segment continues to lose money. A potential strike by NBA players, whose contract runs out at the end of the season, also could cause a drop in the shares.

The Bottom Line

MSG shares could rally into the mid-40s from a recent 27. On a sum-of-the-parts basis, the company could be worth more than $50 a share.

Morgan Stanley analyst Benjamin Swinburne has a Neutral rating on the stock and a 27 price target. He thinks the move by
DISH Networkdish -1.0679125646587686%DISH Network Corp. Cl AU.S.: NasdaqUSD59.29
-0.64-1.0679125646587686%
/Date(1481307443605-0600)/
Volume (Delayed 15m)
:
796099
P/E Ratio
28.416267942583733Market Cap
27869560523.1412
Dividend Yield
N/ARev. per Employee
841615More quote details and news »dishinYour ValueYour ChangeShort position
(DISH) to drop MSG last fall in a dispute over carriage fees could hurt subscriber growth next year, while the renovation could slice into revenue for live events, delaying a recovery in the entertainment unit. Also, even die-hard fans could rebel against higher ticket prices; season tickets for the Knicks are slated to jump by an average of 49% next year.

In an e-mail to Barron's, MSG's Ratner said demand for the company's services is "very strong," and that a "transformed Garden will attract even more big events" and provide "additional opportunities for marketing partners."